Consequently they are forced to rely excessively on

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appear to bring more long term loans to the ﬁrms only when the connections are not via the
controlling shareholders. The ﬁrms where their controlling shareholders are sitting on the board
of banks do not appear to obtain long term loans on preferential volume terms. This is probably
because of the law that limits insider lending discussed in Section 4.1.
The results also show that establishing the board connections either through having the
ﬁrm’s controlling shareholder sitting on a board of banks or having other directors from the
bank to the ﬁrm boards or vice versa are beneﬁcial to the ﬁrms (Speciﬁcation (3) and (4)).
The crony relationship appears to be more important than the ﬁrm characteristic factors in
obtaining long term loans. Banks seem to be more strict on non crony ﬁrms when lending to
them. Speciﬁcally, long term loans seem to be granted to larger ﬁrms, ﬁrms with more tangible
assets and ﬁrms with more stable proﬁt. In contrast, when banks lend to the crony ﬁrms,
the lending decisions are not aﬀected by the ﬁrm characteristics at all. None of the estimated
coeﬃcients on the interaction terms between the crony dummies and the ﬁrm characteristics
turn out to be statistically distinguishable from zero.
[Insert Table 11 Here]
[Insert Table 12 Here] 6 Conclusion We ﬁnd that for Thai ﬁrms, the presence of close ties with banks and politicians – often referred
to as ‘cronyism’ – was by far the most important factor in determining access to long term
debt prior to the Asian Crisis of 1997-98, to the almost complete disregard of standard ﬁrm
characteristics. While Thailand provides perhaps the best laboratory for the testing of the cronyism hypothesis in the shadow of the crisis, we are inclined to believe similar results might
be found in many other emerging economies.
In the wake of the crisis it is easy to implicate such practices.
24 And probably with good cause. However, it is perhaps more useful to ask why such practices existed in the ﬁrst place,
and did they play a role in insulating and facilitating these economies during their earlier periods
of rapid growth. It is useful to juxtapose these ideas with the recent arguments of Diamond
and Rajan (2000c) on banks, short-term debt and ﬁnancial fragility. They argue that countries
with poor disclosure rules and inadequate investor protection will be expected to have limited
long-term debt capacity. Consequently they are forced to rely excessively on short-term debt,
which in turn causes them to be ﬁnancially fragile and prone to crises. Could then soft- budget constraints serve a useful purpose at a low level of institutional (under)development and
become obsolete as the economy develops further? It is diﬃcult to understate the need for further theoretical and empirical work on these issues. 25 References
Barclay, Michael J., and Cliﬀord W. Smith, 1995, The marturity structure of corporate
debt, Journal of Finance 40, 609...
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